Bacon Wilson Legal Blogs

July 23, 2014

In 2014, a person may die and leave as much money to their spouse as they so desire without any federal estate taxes. This is known as the unlimited marital deduction. Normally, when a person dies, the exemption also dies with them. Except for the current time, there is an opportunity to file an estate tax return within nine (9) months of date of death of the first spouse to die, which allows the surviving spouse to utilize the deceased spouse’s credit upon their own death, so long as this exemption is allowed. This is what is known as portability, and is available at the current time, and although there is no legislation pending to rescind this option, one never knows what the future may bring.

In any event, a person who is single or married, with a US citizen for a spouse, has the availability of utilizing their own exemption of $5.34 Million. This exemption amount is indexed for inflation and will probably increase again in 2015. When the law was initially established, the exemption was $5 Million, and in only a few years, it has increased to $5.34 Million.

You may therefore think that there is no problem if you should die and have less than this amount of money, correct? Wrong!

In fact, there are approximately 18 states and the District of Columbia that impose their own estate and/or inheritance taxes. Most of these states do have exemptions, and you should pay attention to the estate tax consequences when planning your estate and perhaps when moving from one state to another.

Some of these states have exemptions as low as $675,000, or as high as the federal exemption of $5.34 million, so it is important to review the tax rates where you are likely to reside when you die. For example, Massachusetts has a maximum rate of 16%, which basically ties into a credit that the federal government provides, what is known as the state death tax credit.

Of course, states are changing their rates and amounts all the time, and New York recently instituted a change that increases the exemption from $1 Million to the federal exemption over the next several years, based on the year and month of date of death.

There are seven states that have inheritance taxes that are unlike the estate tax. The estate tax taxes all estates based on the value of all assets as of date of death, but the inheritance tax taxes the individual based on the relationship of the decedent to the inheritor. In fact, some states have both an estate tax and an inheritance tax.

There are 31 states that have no estate or inheritance taxes, and those are certainly good jurisdictions in which to live at the time of your death. You should also review the income tax status of a state, as there are several states that have no estate taxes and no income taxes.

Although taxes are not a reason to move, it is certainly a consideration if you have a taxable estate.

Average Private Pay Rate (varies from state to state. In Massachusetts $9,000.00 per month, in California $7,628.00 per month).

All of these figures and calculations are meant to be used as the current rates in most states, although these figures vary from state to state, and in some cases, from county to county within a state. Of course, there are always exceptions to the rules, such as whether a gift is really a taxable gift or a completed gift, or whether a gift is a disqualifying transfer for Medicaid purposes or not. Your elder law attorney is available to help you through the process of understanding what these numbers mean and how they work within your plan. You may also obtain information on how to select a qualified attorney on the National Academy of Elder Law Attorney’s website.

June 06, 2014

In an interesting case, a person who had invested approximately $4.8 million in an investment account with Bernie Madoff died in 2006. At that time, the exemption for estate taxes was considerably less than the current exemption ($5.34 million). As required, the estate filed a timely tax return and also paid the estate tax on the assets held with Mr. Madoff’s company. When the Madoff Ponzi scheme was brought to life, the estate then filed a supplemental/amended federal estate tax return, then claiming a refund on the assets that possibly were not going to be returned as the estate claimed that they had a “zero” value.

As anticipated, the IRS filed a motion for summary judgment claiming that under the fair market value standard, at the time of death, the assets had a value based on the fair market value as of that date. They claimed that the standard to determine how assets are valued are what a “willing buyer pays a willing seller” and at that time, no one would have known that the assets were part of a Ponzi scheme that may not have had a lesser value than reported.

The IRS’s motion was denied, and at this time, this matter may go to trial. At the trial, it probably will be the requirement of the taxpayer to prove that the assets should not be valued as of the date of death value based on the investment account having too much money, but that the valuation would have had some value.

In this particular case, the estate had made some withdrawals, and therefore the decedent probably did have some value in the account. The bankruptcy court has allowed certain people to be declared as net winners and some as net losers based on whether they deposited more money than they got back or got less money back than deposited. There are also claims against many of the net winners by the trustee in bankruptcy, including this particular estate.

There is no question that in every case where there are assets that are not quite ascertainable as of date of death, at least the estate tax return should be filed timely, and then an amended return should also be filed timely, within the statute of limitations, in order to attempt to reduce the value, or in some cases, report an increase in the value if it is appropriate to do so.

These matters get quite complex, and is not as easy to merely speculate on what the value is, but when there is a matter that is not ascertainable, it is always best to err on the side of being careful and file the timely return, which is normally due nine (9) months from date of death, as well as having all taxes paid at that time.

March 26, 2014

With tax rates somewhat higher than in prior years based on increases in income taxes, capital gains taxes, and the new so-called Medicare tax, which is basically an investment income tax for those who earned more than $200,000 if single and $250,000 if married, the net rate of return for people may be somewhat lower. Therefore, it is often beneficial to transfer more assets to children and grandchildren, who are probably going to be in lower tax brackets.

It is relatively easy to give money away, as a person has a right to give $14,000 away to as many different people in a year as they so desire without having to file a gift tax return. Keep in mind that a husband and wife may also give a combined $28,000 per year per person. These gifts do not need to be gifted only to children, but may include grandchildren, nieces, nephews, or other relatives, or friends. Gifts to charities are not limited to this dollar amount, but the amount for income tax deductibility will depend on one’s income and itemized deductions.

In addition to the annual exclusion gifts of $14,000, there is also the lifetime exemption of $5,340,000 (in 2014) that a person may give away without paying any tax. This means that a married couple may give $10,680,000 over their lifetime, in addition to the $14,000 annual gifts, before any gift tax will be paid. Also, it should be noted that in most states, there is no gift tax limitation so that should not be an issue.

However, before making gifts, attention should be paid to the tax basis, or what is known as the cost basis of the asset. Once the asset is gifted, the donee (recipient) receives the asset at the donor’s tax basis. For instance, if a person bought IBM stock at $10 a share and it is now at $70 a share, if the stock is gifted, the donee receives the basis of $10 a share, which means that when they sell it, they will pay the capital gains tax on $60.00. However, if the donor died with the stock and left it by will or trust to the donee, then the donee receives it at the date of death value so that when it is sold, there is nominal tax basis if any at all. However, the stock is also included in the estate of the donor, so that if this person had total assets greater than $5,340,000, there would be an estate tax also.

Therefore, as you may see, it is relatively easy to make gifts, but you should pay attention to whether it is beneficial from the estate, gift, and income tax standpoint for all parties before making a gift.

Keep in mind, the issue of gifts discussed in this article is for tax-related issues only, and they are not to be applied for divestment purposes for obtaining Medicaid eligibility, as this area requires a completely separate set of rules and regulations.

March 07, 2014

Every year, certain important information on changes of tax and other important numbers are revised. The following is a listing of some of the most important numbers for 2014. Some have changed, and some have remained the same.

Social Security Tax Wage Base- $117,000

Individual Retirement Account- Traditional Contribution- $5,500

ROTH, IRA- Individual Contribution- $5,500

401k, and other types of Retirement Plans limit - $17,500

Additional catch-up contribution if 50 or older-$5,500

Business mileage- .56 cents/mile

Charitable Mileage- .14 cents/mile

Standard deduction on income taxes for married filing jointly-$12,400

Standard deduction for single person (or married filing separately)- $6,200

October 16, 2013

There are many incentives
available for paying for higher education. I will attempt to list a few of the
more popular ones, but in most areas, you can obtain all of the benefits by
contacting a person who is dedicated solely to providing educational services.
This individual usually charges a fee, but the fee is usually nominal compared
to what the savings will be when you qualify for the benefits. You may also
contact a local estate planning council to see if they have a member who
provides these services, as opposed to merely selling products.

529 Savings Plan
With this plan you contribute money as a gift, (and the amount may be up
to the annual exclusion for gift purposes - currently $14,000 per year in
2013) without having to file a gift tax return. The distribution is not
taxed for federal income tax purposes so long as the funds are used solely
for educational purposes, as defined. In addition, you may be able to
transfer this account to other family members if the primary and intended
initial beneficiary does not utilize the funds, for instance, if they do
not attend school or they obtain a full scholarship. However, the assets
in the fund may be assessed against you (the parent) for purposes of
determining the formula for obtaining financial aid. This may be also be counted
against you if a grandparent has contributed. It may also be assessed
against your child, which is a different rate of assessment by the
financial aid calculation.

Educational Savings Bonds
These are bonds that are purchased from the U.S. Treasury, which must be
owned by your (the donor’s) dependent. Again, these are not taxed if used
for educational purposes, but if not, then the recipient of them will be
taxed when they are cashed in. These also are limited, based on income,
and they should be cashed in another
year, rather than the year where the assessment is needed, as they are
then counted towards the assessment for financial aid. Remember that although
they are not going to be taxed if cashed in and used for education
purposes, they are still utilized in the calculation for assessment for
financial aid purposes.

UGMA/UTMA –
These are Uniform Gifts to Minors Act / Uniform Transfers to Minors Act,
which are assessed by the formula for financial aid. They could be
converted to a 529 Plan if that would be beneficial for calculation of the
assessment. However, when the beneficiary (child) comes of age, depending
upon the state the plan is established under, then the beneficiary becomes
the owner and can withdraw the funds at his or her discretion.

October 02, 2013

Many of you remember
when interest rates on your certificates of deposit (CDs) were earning anywhere
from 10-15% annually. Well, with the use of some charitable giving techniques, you
may be able to convert a significant amount of your wealth into income
producing assets, as substantially higher rates may be obtained than those
possible through more traditional vehicles, such as a CD or savings account.

One tactic is to
establish what is known as a charitable lead trust. With this type of trust,
assets are placed in it, and you will receive a charitable deduction for a
portion of the funds contributed or donated, since it has a charitable purpose.
This would become significantly attractive for stocks that have a substantial increase
in value since purchase. In this situation, the charity will receive a rate of
return that you set, and all involved will hope that the rate of return
actually recognized by the trust will be greater than the amount paid out. Income
received by the charity during the your lifetime, as the donor, or for a period
of years, will be set at the initiation of the trust, but all remainder amounts
left when the trust terminates will pass your (donor’s) family, be it children,
grandchildren, etc. When the funds are distributed, they are basically tax free
to the recipients.

A similar trust is a
charitable remainder trust. Here, appreciated assets are contributed to the trust,
and when sold, some capital gains are recognized, but you will receive a
charitable deduction on your tax return for a portion of the funds contributed.
In this case, the income from the trust is recognized by you (the individual
donor) or your family during lifetime, and the remainder passes to charity.

Based on the current
allowable rates by the Internal Revenue Service, you are entitled to receive a
rate of return based on your age, and this ranges from approximately 6% for a
person in their 60s to over 9% for a person in their 80s. In some cases, there
may not be sufficient income to pay the funds out to the charity when the trust
is to terminate, and therefore, so long as the “testing” of the amounts passes
for IRS purposes, the trust is allowable and may pay less money to the charity
at the termination, but distribute more money to the family on a tax free, or at
least, a lower tax bracket than otherwise would have been taxed.

A similar opportunity is available, provided by many charities, known as
a charitable gift annuity. This is very similar to a charitable remainder trust,
although there is no trust established, but merely a relatively straightforward
document where you can give money to a charity, and in return receive an
annuity for a certain period of time, or possibly throughout your lifetime.
Again, you will receive a payment based on your age, (and the interest rate for
an older person is greater than that of a younger person) and in most cases,
the money returned to you will be substantially greater than what you could
receive from a CD, money market account, or a similar asset that does not
fluctuate with the market. Some people determine that they really don’t need
the income from time to time, and they gift it to the charity, thus allowing a
larger income tax deduction for that year.

Most national charitable
organizations, such as the American Cancer Society, American Heart Association,
and most colleges, universities, and hospitals have planned giving officers who
would be pleased to assist with the preparation of this type of gift. Most also
have software that will calculate the income tax consequences of making a gift
as well as the estate and gift consequences if the you request that
information. With the gift annuity, it is usually not necessary for you to obtain
legal and accounting assistance, but in most cases, professional should be
consulted ensure that the proposal is in the your best interests and that the
appropriate assets are being contributed to the gift annuity.

August 29, 2013

The Supreme Court’s
recent decision relative to the determination that the Defense of Marriage Act
was unconstitutional leaves many to believe that planning for all individuals
will now be the same. This is not true. Each situation needs to be reviewed to
determine the best plan and approach for each individual/couple.

There are still many
people who are living together and do not wish to marry, and many people, (heterosexuals
as well as gays) are inquiring as to whether they should get married or merely
live together. There are lots of decisions that have to be made, including those
regarding health, insurance, income and estate taxes, family relations, social
security benefits, etc.

Income tax is one of the
major issues that has to be reviewed for each person individually and as it relates
to both as a marital couple. Normally, an accountant will be engaged to work
out and estimate the projected income tax cost if the couple gets married or
remains single. This mathematical formula can display a significant change in
taxes due, especially when one person makes a significant amount of money and
the other does not. Sometimes the net benefit is substantial, and other times,
it is a detriment to have two people earn more money, and then be placed in a
higher income tax bracket, where itemized deductions are limited and the
Medicare surtax may be imposed. While there is no right or wrong decision, tax
is an important consideration when deciding whether or not to marry.

Likewise, the issue of
estate taxes needs to be reviewed, not only for federal purposes, but also for
the state. As the federal exemption between spouses is unlimited, it may not be
so much of an issue on the first death, but on the second death, the surviving
spouse has an exemption of $5.25 million dollars, which could trigger an estate
tax. However, at the current time, the process of utilizing portability is
available, where the first spouse’s exemption of $5.25 million (as indexed for
inflation) may be made available to the surviving spouse if the first spouse’s
estate filed a timely return with the IRS claiming portability.

In addition, a state’s
law relative to estate taxation may be a consideration if the state recognizes
same sex marriages, since if a couple is not married and there is a tax due on
the first death, it may be preferable to eliminate the tax with the use of the
unlimited marital deduction, which does not apply to cohabitants.

If the couple has
already married, and had filed separate income tax returns, it may be
beneficial to amend those returns, going back three years, to receive a refund.
Even if the state does not permit a same sex marriage at this time, it may be
preferable to file the federal return as an amended return and also file the
state return, so that if and when a state may legalize same sex marriages, the
statute of limitations will not be lost.

Additional questions relative
to the effect of the new law on tax issues follow:

Does
the couple have a marriage that is deemed to be legal for federal purposes?

Does
the state currently allow the same sex marriage, and if not, would the couple
consider moving to a state that allowed the same sex couple to marry?

What
are the federal income tax obligations, and do they increase or decrease as a
married couple or remaining single?

Should
federal and state returns be amended, and is there a risk in doing so?

What
other employee benefits are available or mandated to be available for a same
sex spouse?

What
changes should be made to estate plans, including health proxy, power of
attorney, wills, trusts, etc.?

Should
the couple consider a pre-nuptial agreement in the event that the marriage does
not work?

Again, there is no right
or wrong as to what a person should do in these situations, but at least there
are choices to be made at this time that did not exist previously. With the advent
of legalization of marriage for federal purposes, individuals must review their
plans to determine how their lives will be affected legally, emotionally, and
otherwise.

July 17, 2013

Is a contribution
to the U.S. government tax deductible?
In a recent opinion, the IRS determined that a person who wished to make a gift
to the Treasury Department of the United States government, in order to
specifically have the funds reduce the national debt, qualified for a
deductible charitable contribution. A gift for the government must be for
public purposes exclusively, which includes the reduction of the public debt.

As with all charitable contributions, any gift over $250 requires that a
written acknowledgement from the donee be received by the donor, including the
amount of the gift, a statement whether any goods or services were received, as
well as an estimate of the value of the goods or services provided. Naturally,
if the gift is merely a cash gift, without any services provided, then the full
amount of the gift should be a charitable deduction.

Can one
maintain strings on their gifts?
When a person makes a gift, normally in a trust or other manner, it is an outright
transfer that qualifies for a charitable deduction. However, if a person makes
a gift and allows someone else, normally a family member, to veto a charitable
bequest or to determine the amount passing to the charity, then the gift will
not be considered to be a charitable deduction, as the value is not ascertainable
as of the date of death.

A decedent, however, may designate the assets passing to a charity while
gifting a family member the right to designate which charitable entity may
receive the gift. Since the funds are not passing through the family member,
but rather, are being transferred directly from the donor to the charity, a
charitable deduction is normally allowed.

A donor, upon their death, may also give a family member the right to disclaim
a gift. With a disclaimer, it is basically a renunciation of the funds, and
upon renunciation, if those funds pass to the charity, then the estate also
obtains a charitable deduction from the estate for that amount. Normally, a
disclaimer must be filed within nine months from date of death or the interest
vesting in the proposed beneficiary.

In some cases, it may be advisable to have funds left to family members with a
contingent beneficiary being a charity. If the beneficiary disclaims and the
funds pass to charity, then that amount may be used to reduce the estate for
estate tax purposes and possibly reduce or eliminate any estate tax.

Does a
gift to a person qualify for a deduction? A question was posed to the
Internal Revenue Service from a congressman on behalf of a constituent. The
question regarded the possible deduction of a gift to his church scholarship
fund, wherein the donor had proposed that the gift to the fund was to be used
specifically for college expenses of the minister’s daughter. While a gift to a
charity that is approved as a non-profit entity by the IRS is usually deductible,
this gift, which was designated for a specific person, became a restricted gift
and was not a contribution that could be deducted on their tax return.

If the church fund receiving the assets was in the position of making the
decision as to whom would get the money, then it probably would have qualified
as a charitable deduction, but in this case, the church did not have full
control over the gift or the discretion as to how to use the funds.

As
with all issues that are in the “gray” area, it is always best to check with
your tax advisor or attorney to determine the proper method of making a gift
and the hopeful deductibility and tax benefit of the gift.

June 19, 2013

Some people like to keep things like old bank statements,
electric bills, etc., and some are people throw them away as fast as they
receive them. I recently started to clean my basement and found records going
back some thirty years. While I am certainly not a hoarder, I do have lots of clutter
that must be dealt with.

Clutter can make a difficult time ever more so if you should
happen to pass away without first dealing with it. What a mess you would leave
for your family. The following is a short synopsis and guide as to what to keep
and what to toss or shred.

Records to keep:

Legal records, including wills, life insurance policies
should be retained indefinitely, as well as information regarding the purchase
or sale of a home, second home, timeshare, etc., as you will need them to
determine the tax basis or cost of such assets, so that when they are sold, you
or your heirs will not be paying excess capital gains tax. These records should
be in a separate box and clearly marked “do not destroy,” but once the assets
are sold and the statute of limitations has run on the government being able to
audit or review the return, then they may be destroyed. Some people like to
keep their deeds and mortgages for posterity, and some people actually frame
their old deeds and mortgages for decoration, as many of them were colorful or
handwritten with a fountain pen.

Tax returns, investment statements, 1099 Forms, W-2s, etc.
should be kept for seven years, as the IRS has several years to audit a return
once it has been filed. It is also normally good to keep records of stock purchases
and sales in the event of a review by tax authorities. Such financial documents
are also important to retain in the event that you need long-term care, as
often the Medicaid office will request bank records and tax returns for five
years prior to you requesting such assistance. If the records do not exist, you
may be required to purchase them from the bank or financial institution, and
this could be somewhat expensive and time consuming.

Pay stubs, credit card bills, bank statements, etc, are
probably necessary to save for only one year, although if the records have to
do with taxes, they should be kept for seven years. Most credit card companies,
utilities, and banks have records available relatively easily, (although there
may be a fee imposed for them), but they are available nonetheless. A problem may
arise when a bank is acquired by another bank, and the acquiring bank must keep
these records for some period of time, but they usually do not keep them any
longer than the required seven years. The same is true of brokerage firms and
utilities that are being acquired, merged, or sold.

It may be helpful to label the box that is holding these
records so that when you place the 2013 records in your storage, you can then
remove the box from 2006 and have those records shredded. In this manner, you
never have more than seven years records at a time, and you are continuously purging
the old records as you replace the most recent year in the storage area.